Stock Market…What More Does It Want?

Stock Market ... What More Does It Want?Probably as good a benchmark stock for the global economy as you can get is Caterpillar Inc. (NYSE/CAT). If an economy is doing well, it’s building new roads and buildings and that takes heavy equipment. The company’s fourth-quarter corporate earnings blew past Wall Street’s consensus, growing 60% to $1.55 billion on a 24% jump in sales. Caterpillar guided 2012 above current consensus. In addition, the stock market has bid Caterpillar’s shares up some 40 points from last October, to its current price, which is right around its all-time record high. When Caterpillar’s corporate earnings are doing well, that’s a really good sign for everything else.

The stock market has some decent price momentum now, and news from the Federal Reserve that it plans to keep interest rates at their current level going in 2014 is the kind of certainty that investors like. The stock market has accommodative monetary policy, good corporate earnings, and a reasonable valuation to go on. What it needs to take itself to the next level are better economic data. Recent news on durable goods showed a three-percent gain in the month of December, on top of an upwardly revised 4.3% gain in November. Clearly, there is momentum out there. Let’s hope it keeps going.

I am worried that corporate earnings will slow in the bottom half this year. Without growth in employment, U.S. incomes cannot grow and the consumer, Main Street economy will be stuck. A lot of the great earnings we’re getting form large-cap companies are due to their international operations generating the growth. While demand is improving domestically, it’s nowhere near where it was.

Near-term, the stock market is looking good. The S&P 500 Index solidly broke 1,300, and it has performed very well since the beginning of the year, as if a switch on investor sentiment were flipped. Commodities are also confirming the price strength of the stock market, and this is important. Although it’s hard to tell, it’s possible that the correction in gold and silver prices is now over. (See Precious Metals Winners—Three Excellent Wealth-creating Stocks.)

Cautious optimism is my outlook for the stock market right now. With the expectation for 10% growth in corporate earnings, there’s no reason why the stock market can’t accomplish a similar gain for the year or better. If expectations for corporate earnings begin the decline later this year, then all bets are off. The marketplace desperately wants more growth—in the economy and in corporate earnings. Without it, the stock market will sell off just like last year.